Until a few years ago, business software companies earned their revenue by charging for up-front license fees and ongoing maintenance. Then Salesforce.com (NYSE: CRM) made a splash with its subscription approach, and now we're seeing some vendors actually giving away business software. What does this all mean?
There's plenty at stake in enterprise software. According to a report from Gartner, the North American market for business software totaled $12.7 billion in 2006. Its major players include SAP (NYSE: SAP), Oracle (Nasdaq: ORCL), and Microsoft (Nasdaq: MSFT).
Now, a wave of new entrants want to disrupt the old guard's dominance. Spiceworks, which recently landed $8 million in venture capital, develops network management software, helping to manage information technology (IT) assets. It's a strong software offering - and it's free. The company generates revenue purely from advertising, and so far, it's signed up more than 120,000 users.
Even BT Group (NYSE: BT) is jumping into the fray. The telecom giant has released a free business software suite to help users with payroll, sales & marketing, and HR. To make money, BT charges users for premium features, such as a 24/7 legal helpline.
Free offerings are certainly attractive to cash-conscious companies in need of automation. All the same, the freebies have some drawbacks.
"I purposely avoid clicking on or watching any Web-based advertisements in my day-to-day activities," said Christopher Cabrera, the CEO of Xactly, in a Fool interview. "So unless you have the scale of Google (Nasdaq: GOOG), I think it can be tough to generate sufficient revenues. And do you want your employees to click on an ad and move away from working?"
Still, the software industry shouldn't ignore the free movement. "I think a model like this could be a powerful lead-generation tool to give potential prospects an opportunity to experience the software," said Taleo (Nasdaq: TLEO) CEO Michael Gregoire in a Fool interview. "But I would plan for massive churn and a slick way of converting users to a non-ad supported model that you can charge for."
For the most part, I think the massive business software industry is fairly safe. After all, businesses want to pay for software that is reliable, secure, and continually improving. With their reputations and legal fortunes on the line, the consequences of a program gone awry could be painful -- and definitely not worth the price of free software.
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